A fevered debate has erupted over contingent deferred annuities, or CDAs. On one side are carriers (Prudential being one of them) and industry groups such as the ACLI that assert they are annuities. Challenging that view are MetLife and some state insurance officials that contend they are a financial guaranty product. Opponents also raise concerns about how insurers can properly reserve for a CDA policy, an issue seconded by Fitch Ratings. (MetLife declined to comment for this article.) Recently, a study group of the NAIC weighed in, saying CDAs are a hybrid of both.
But what exactly is a CDA? And are they in widespread use?
Simply put, a CDA is similar to a variable annuity, except the assets and/or funds underpinning the annuity are chosen not by the insurer, but by the policyholder (along with his financial planner). The ACLI defines a CDA as a “stand-alone living benefit that provides guaranteed lifetime income based on the value of assets held outside the insurance company.” Those assets could be, for example, mutual funds.
Beth Pickenpaugh, an actuary and financial planner with Gianola Financial Planning in Columbus, Ohio, defined CDAs as a blending of an annuity, longevity insurance and market volatility insurance. In an email exchange, she said she does not use CDAs in her practice. “But I recommend the longevity insurance piecebasically a single premium deferred annuity that starts at a specified advanced age such as 80 or 85that is imbedded in a CDA as insurance against asset depletion.”
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It’s because of that longevity component that Prudential views CDAs as annuities, says Bruce Ferris, head of sales and distribution for Prudential Annuities in Shelton, Conn. “They provide lifetime income streams, so they address longevity risk,” Ferris says. “By providing lifetime income, they are defined as annuity products because of the risks that they address and the requirements of managing those risks. It is clearly a point of discussion and debate in the annuity and insurance industry. I tend to view that as healthy because regardless of the outcome, the discussion is around how we can bring better solutions to consumers who are looking to meet the challenges of a secure retirement.”
Yet Ferris concedes that many financial planners are reluctant to utilize CDAs, or annuities in general, in their practice. “They either think they are too expensive, too complicated, or they’ll underperform,” he says. “I’ll leave that debate aside. But what they do value is working with clients, and helping them asset allocate, diversify and then manage risk for their long-term objections of both savings and retirement. And the idea of bringing an income solution to their business practice, I believe, is an opportunity to attract more interest because we’re looking to do business on their terms, not on our terms.”
One advisor who clearly advocates for CDAs is Rao K. Garuda, president and CEO of Associated Concepts Agency, Inc. in Cleveland and a founding member of First Financial Resources, which has 75 partners across the U.S.
Yet he concedes that CDAs are not in widespread use now. (LIMRA had no data on CDAs.) But with people living longer and the Obama’s administration’s aim to make annuities part of 401(k) plans, Garuda predicts their usage will increase in coming years.
Garuda says that a CDA could become part of an overall financial plan that addresses the concern of outliving one’s income during retirement. “People who live beyond their life expectancy really have no way of making sure there is income if they live too long. The CDAs are designed to cover that gap,” he states. “It’s going to become very popular in the future as people live much longer.”